Contraction remains market reality

The government's estimate that industrial output in October fell from a year ago, the first contraction in 15 years, surprised many and drove some to echo the “R” word — recession.

Business groupings were quick to renew their calls for further cuts in interest rates and another round of fiscal stimulus.

Experts said the numbers, released on Friday, could lead them to cut down on this year's growth forecasts for the broader economy.

Although the scene is bad, an analysis by Hindustan Times shows that a turnaround through remaining part of the fiscal year is possible if the government and the central bank act fast and decisively, to spur consumer demand.

The contraction in October is largely because of the 2.3 per cent fall in output of consumer goods, which, in turn, is attributed mostly to manufacturers' decision to clear inventories rather than increase production.

“The data shows that the slow down is really deepening. There seems to be inventory corrections, which will even out in the next couple of months,” said Harsh Pati Singhania, managing director of JK Paper Ltd.

This is not the first time consumer goods have seen a contraction during the festive season. It happened last year and the year before, but in those falls were more than offset by robust growth in capital goods. This time around, capital goods registered 3.1 per cent growth, but that wasn't good enough to pull up overall industrial output.

The index of industrial production must go up and up from now if growth for the current fiscal year has to end in a respectable range of 4 to 5 per cent.

The government's recent decision to cut fuel prices and stimulate demand through excise duty reductions has begun to kick in, but the mood remains cautious because large retailers are faced with falling sales and a need to conserve cash, said Tushar Poddar, analyst at Goldman Sachs. FICCI secretary general Amit Mitra is for a second fiscal stimulus.